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Reducing our investment carbon footprint

16 May 2018

Liontrusts’s Mike Appleby talks about how the fund manager’s Sustainable Future Funds look to invest towards a lower carbon economy

Carbon exposure remains a central issue for sustainability and with many companies innovating in the energy space. It can represent a positive investment theme rather than simply a large corner of the market to avoid.

Liontrust’s Sustainable Future Funds continue to have a considerably smaller carbon footprint than mainstream equity indices, with holdings across the portfolios emitting 70% less CO2 on average.

This is consistent with previous analysis showing the Funds emit relatively low amounts of carbon dioxide. While this analysis has some shortcomings – failing to capture the emissions from the use of products or services the companies provide for example – it is a useful starting point for investors to see how our Funds compare on CO2.

By investing in companies that emit less CO2, the Funds are better positioned to withstand any carbon cost inflation as underlying holdings will have less additional costs to pass on to their customers. In short, the companies in the Funds have margins that are more resilient to emissions regulations, which we see becoming tighter over the medium term.

Source: MSCI ESG Carbon Analytics Report, 01.03.18, using holdings data as at 31.12.17. The measure for this analysis is Total Carbon Emissions (tCO2e /$m invested) for the Sustainable Future funds relative to their conventional benchmarks

The same analysis, by MSCI ESG Carbon Analytics, estimates the Funds have an average of 28% (between 13% and 46%) invested in clean technology solutions to combat climate change.

Source: MSCI ESG Carbon Analytics Report, 01.03.18, using holdings data as at 31.12.17 and MSCI classification of companies offering clean technology solutions

We construct our portfolios from the bottom up, based on fundamental analysis, to identify well-managed companies that are beneficiaries of structural changes and have good prospects to remain profitable. We believe getting these elements right in an investment maximises the chances of generating competitive returns.

While the focus of this year’s Earth Day was on our oceans, the UK was quietly working towards another milestone in electricity generation: the country was powered without coal for a record 3-days during April, underlining the polluting fuel’s ongoing decline.

This came just a year after a watershed first 24 hours without coal since the nineteenth century in April 2017. Ofgem data shows power from coal fell to 10% in 2017 versus 48% in 2006.

Much of the electricity still comes from fossil fuels and we are far from completely renewable sources but progress, and opportunities, are clear. Our investment approach to carbon risk – as well as carbon opportunities – uses a combination of:

• Actively avoiding carbon-intensive businesses (as we believe their future profitability to be overestimated by the market). We do not invest in the primary extraction of fossil fuels such as coal, oil or natural gas, airlines or auto manufacturers

• Seeking out the best operationally managed companies that are proactively managing their business to mitigate increasing regulatory burdens designed to make big emitters pay

• Actively looking for exposure to profitable businesses providing solutions to help emit less pollution

While no investor can completely avoid exposure to fossil fuels, as all companies use electricity, we invest in businesses that profit from the positive change under way in our energy system.

We look for companies reducing costs through energy efficiencies, selling products that drive efficiencies for others or generating and transmitting renewable energy. Naturally, we avoid companies that stand to lose from these positive trends – the fossil fuel sectors.

The ‘Fossil Free’ movement calls for asset owners to end support for the industry by freezing new investment in fossil fuels and selling positions in equities or corporate bonds within five years. Our Funds have long taken a more positive approach, investing in companies profiting from accelerating the decarbonisation of our economies and those with low exposure to carbon risk, and also avoiding investment in coal, oil, tar sands and natural gas.

Our thematic investment ideas continue to evolve rapidly but currently include insulation providers, vehicle battery components and power semiconductors.

In summary, there are global commitments to transition away from fossil fuels and we believe there are profits to be made in meeting those challenges and risks for companies on the wrong side.

By providing capital to companies that are leaders in these fields, we believe we can continue to profit from a credible pathway to a lower carbon economy and the UK’s recent coal-free stretch suggests this is gathering pace.



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